When workers are compensated partly in unvested equity, they may leave the firm if they observe low managerial effort, reducing the firm’s value and the manager’s compensation. We call this the worker monitoring channel. Through this channel, unvested worker equity grants can increase managers’ effort incentives, despite diluting the manager’s equity stake. Worker monitoring also links compensation markdowns to managerial incentives, since worker exits are...

Advances in artificial intelligence raise fundamental questions about how technology reshapes human skills. Modern AI systems may crowd out active human decision-making; unlike past technologies, such decisions are a key input for training and improving AI models. We develop a framework based on Markov matrices to study how AI substitutes for and augments different human skills, and how decision authority -- whether the technology is...

This paper characterizes the optimal contract when the agent is endowed with aspirational utility. Our analysis reveals that effort and aspirations act as complements: the principal utilizes aspirational ``boosters'' to induce local risk-loving behavior, reducing the welfare costs of incentives and leading to higher effort levels. We find that the optimal compensation contract features a discontinuous jump to reach the aspiration point after good performance,...

I study the optimal integration of humans and technologies in multi-layered decision-making processes. Each layer can correct existing errors but may also introduce new ones. A one-dimensional quality metric – a decision-maker’s error correction capability normalized by its new errors – determines the optimal rule: deploying higher-quality technologies in later stages. Interestingly, the final decision-making layer may not achieve the greatest error reduction; instead, its...

Many regulations aim at promoting coordination among creditors in bankruptcy by ex post restricting their ability to exit distressed firms. However, such restrictions may harm creditors’ ex ante incentives to stay invested, thereby worsening coordination outcomes. We build a dynamic coordination model to show how this force shapes creditor runs, bankruptcy filings, and regulation designs. Intriguingly, filing for bankruptcy early, thereby preserving more assets for...